Utah Federal Court Holds That Incontestability Statute Bars Insurer From Avoiding Death Claim on STOLI Policy

by Orrick, Herrington & Sutcliffe LLP
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On March 13, 2017, Judge David Nuffer of the United States District Court for the District of Utah granted defendant Wilmington Trust Company's motion to dismiss a lawsuit seeking to invalidate an alleged "STOLI" (stranger-originated life insurance) policy in Sun Life Assurance Company of Canada v. Wilmington Trust Company, No. 15-cv-00758. The court held that Utah's incontestability statute barred plaintiff Sun Life Assurance Company of Canada's claims and rejected Sun Life's arguments that the insurance policy was void ab initio

The lawsuit stemmed from a $6 million universal life insurance policy (the "Creer Policy") issued in 2007 on the life of 85-year-old insured, Florence Creer. The initial owner and beneficiary of the Creer Policy was a Trust set up by the insured, with the insured's husband named as trustee. The initial premium payments were made by a company affiliated with the insured, but the money was actually sourced from the insurance broker who facilitated the policy application. That broker was, in turn, reimbursed by investors.

Shortly after the Creer Policy was issued, a new trustee was appointed and additional premiums were paid to Sun Life by Private Equity Management Group, Inc. ("PEM"), the investor group that funded the initial premiums. In April 2009, the SEC commenced an action against PEM, accusing it of the fraudulent offer and sale of securities, including life insurance policies. In the context of the action, a receiver was appointed to administer PEM's assets, including its interest in the Creer Policy. Control over the Creer Policy and PEM's other assets were later restored to PEM, and Wilmington Trust was appointed as securities intermediary and became the owner and beneficiary of the policy in 2011.

When the insured died in 2015, Wilmington Trust submitted a claim on the Creer Policy. Sun Life reviewed the claim and determined that the insured's family did not fund the premiums and could not have afforded the policy, and that PEM had funded the policy from origination. Sun Life concluded that the Creer Policy was a sham, and it filed an action seeking to have the policy declared void ab initio because the policy was either an illegal wagering contract and/or lacked an insurable interest, or because the Trust was invalid and lacked the capacity to contract. Wilmington Trust moved to dismiss for failure to state a claim.

The District Court found that Sun Life's claims were barred by Utah's incontestability statute, which states that "a life insurance policy is incontestable after the policy has been in force for a period of two years from the policy's date of issuance." Utah Code Ann. 1953 § 31A-22-403(2)(a). As the court simply put it, because the Creer Policy was issued in 2007 and the complaint was filed in 2015, "Sun Life is six years too late." 

The court rejected Sun Life's arguments that the Creer Policy was void ab initio under Article 6, § 27 of the Utah Constitution, which prohibits wagering on the life of another by persons without an insurable interest. The court pointed to Section 21-104 of the Utah Insurance Code, which bars a person from knowingly procuring an insurance policy without an insurable interest, but also states that an insurance policy is not invalid if procured in violation of the statute. In response to Sun Life's argument that the Utah statute, as interpreted, allows for impermissible gambling contracts, the court cited to the Seventh Circuit Court of Appeals decision in Sun Life Assurance Company of Canada v. U.S. Bank National Association, 839 F.3d 654 (7th Cir. 2016), involving a similar situation under Wisconsin law, which we have previously covered here. Like the Seventh Circuit, the court found that there is nothing inconsistent between a law that prohibits wagering on the life of another and one that says a policy is not invalid because it lacks insurable interest. The court explained: "The insurer has two years to investigate. If during those two years the insurer does little or no due diligence, then the legislature, in enacting Section 21-104, has not authorized gambling; it simply changed the remedy for violating the insurable interest requirement." The change in remedy is that the insurer loses its right to challenge the policy.

Finally, the court found that Sun Life lacked standing to challenge the validity of the Trust, rejecting Sun Life's argument that the Trust never came into existence and could not apply for or enter into the Creer Policy. While the Utah Insurance Code was amended in 2009 to allow insurers to challenge the validity of a trust, the court held that this statute did not apply retroactively, and that Utah law did not otherwise endow an insurer with standing to challenge the validity of the Trust. Opinion.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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